One of the recommendations contained in Lord Hill's UK Listing Review was for the UK Government to convene a working group to consider how best to improve the efficiency of secondary capital raising by listed companies.
To this end, the UK Secondary Capital Raising Review ("Review"), chaired by Mark Austin, was published in July and is described as an "opportunity for bold and brave and once-in-a-generation reform".
The Review is certainly broad in scope and the recommendations will significantly change the landscape of secondary capital raising in the UK.
The Review notes that its conclusions have broad market support following consultation with industry groups, trade bodies and other stakeholders and is presented as "'received wisdom' in the market". The government has accepted all of the recommendations issued in the Review and both the Financial Conduct Authority ("FCA") and Pre-Emption Group ("PEG") have issued statements welcoming the Review.
Despite this support, it is clear that the reforms are not going to be a quick fix and it will take time, together with industry, regulatory and government support, to implement each of the recommendations.
As detailed in this briefing note, the Review sets out, in relation to each recommendation, whether it will be implemented immediately, or in the near or medium term, and we can build a clear picture of how, and when, the UK secondary capital raising regime will change.
The Review contains twenty-one recommendations broadly guided by four key principles – the maintenance of pre-emption rights for existing shareholders, offering issuers time and cost-efficient fundraising structures, the availability of a broad range of capital raising structures and enabling retail investors to participate in capital raising.
This briefing note sets out some of the key recommendations contained in the Review.
Maintain and enhance the pre-emption regime (implementation timetable: immediately)
There is no question of the UK adopting a US-style of approach and removing the protection of pre-emption rights. The Review notes that respondents to the Call for Evidence provided strong support for the retention of this principle as "a hallmark of the UK market". Instead, the focus of the Review is on improving the secondary fundraising regime within the principle of pre-emption.
Enhancing the transparency of pre-emption oversight by the PEG
The Review recommends that the PEG should be put on a more formal and transparent footing by:
- ensuring that its membership represents the current ownership of UK listed companies including global institutional investors and the retail investor community;
- updating its terms of reference (which should be made available on the PEG's website);
- publishing an annual report on how the pre-emption regime is operating including publicly available data on requests for pre-emption disapplications;
- contributing to the Chancellor's annual State of the City report to Parliament; and
- publishing a template reporting form to standardise post-transaction disclosures.
Increase the flexibility for companies to carry out smaller fundraisings on a 10% + 10% basis (implementation timetable: immediately)
To enable companies to raise capital quickly, the Review recommends that the PEG restate its Statement of Principles to support disapplication resolutions of up to 20%. This broadly mirrors the temporary recommendations put in place by the PEG in April 2020 in light of the pandemic which, the Review notes, was well received by the market.
The Review recommends that the current 5% + 5% structure set out in the PEG Statement of Principles should be replaced with a 10% + 10% structure. The first 10% can be used by the company for any purpose. The next 10% should only be used for a transaction which the board decides to be either an acquisition or a specified capital investment (as defined in the PEG Statement of Principles) announced at the same time as the share issue, or which has taken place in the previous 12 months.
There will also be a number of conditions for companies to comply with on similar terms to those in place in 2020.
The Review also recommends that standardised post-transaction reporting should take place on all non-pre-emptive offers using a template form to be published by the PEG.
Issuers will be required to release the completed form via the regulatory information service and to submit the form to the PEG where it will form part of a publicly searchable database.
Guidance to support consideration of higher disapplication authorities for capital-hungry companies (implementation timetable: immediately)
Concerns were raised in response to the Call for Evidence about the challenges faced by companies in capital-hungry sectors like tech and life sciences.
The Review therefore recommends that the updated PEG guidance includes specific provision for growth companies seeking authority to disapply pre-emption rights to a threshold above 20%. The upper limit of such an annual disapplication request is likely to be 75%.
An issuer will need to seek shareholder approval and make a clear, specific argument for the enhanced authority. It may also be appropriate for the issuer to seek authority to disapply pre-emption rights for a longer period of time than the current annual market standard.
Involve retail investors in all capital raisings (implementation timetable: immediately/near term)
The reforms set out in the Review seek to ensure that all shareholders, including institutional and retail investors, are treated equally.
Involvement of retail investors in all capital raisings
The Review recommends that issuers should give due consideration to the interests of retail shareholders, as well as other existing shareholders, and how to include them in a non-pre-emptive offer as fully as possible.
The Review will not provide a single mandated structure for retail inclusion noting that factors such as the size of the offer, and the number of retail shareholders, will influence which structure works best.
The Review considers a 'follow-on' offer (where an institutional-only placing is followed by a subsequent offer to retail shareholders on broadly similar terms) and the use of retail investor platforms as two possible approaches to ensure the inclusion of retail investors.
Shorten the 'six-day rule'
The Review also seeks to assist retail investors to participate in initial public offerings (IPOs) on the basis that the recommendations contained in this Review will be more effective if retail investors can more easily form part of a company's register from the start.
To this end, the Review recommends that the period a prospectus for an IPO that involves a retail offer has to be made available to the public be shortened from six days (the 'six-day rule') to a maximum of three working days.
Reduce regulatory involvement in fundraisings (implementation timetable: near term)
The position of the Review is that, as a default, regulatory scrutiny and involvement in secondary capital raisings should be removed given that these involve listed companies that are already subject to disclosure and other continuing obligations, and shares are to be issued to existing shareholders who have already made the decision to invest in the company. Instead, the Review puts forward a light-touch regulatory framework.
Admission to trading prospectuses
As detailed in our previous briefing note, following HM Treasury's review of the UK prospectus regime, the FCA will have responsibility for determining if, and when, a prospectus is required in relation to secondary issuances.
The Review considers that an admission to trading prospectus should only be required "where there has been a material shift in what it means to be invested in an existing listed issuer". On this basis, the Review recommends that an admission to trading prospectus should only be required for secondary offers where the offer size is at least 75% of the existing share capital.
In the reduced circumstances when a prospectus is required, it will remain subject to prior FCA approval.
The Review also recommends that a secondary offer should not trigger the need to appoint a sponsor, whether or not a prospectus is required.
The Review notes that, unlike a new applicant for listing, an existing listed company will have experience in complying with ongoing obligations and it should be for the board to determine when to seek expert advice on the listing regime. The Review anticipates that the working capital diligence approach used on placings, in line with industry guidance currently in place, should be followed on secondary fundraises in place of sponsor declarations.
Sponsor declarations on a circular will continue to be required where the issuer is undertaking an acquisition or other transaction that constitutes a Class 1 or reverse takeover transaction.
Working capital statements
The Review recommends that the FCA's approach to working capital statements in a prospectus, whereby clean working capital statements cannot be accompanied by disclosure of assumptions in relation to that statement, should be reconsidered and revised to allow issuers to provide such disclosures to investors.
In this way, the prospectus working capital statement will align with the disclosures permitted in the going concern, viability and the upcoming resilience statements contained in a company's annual report.
Importance of vote
Where voting, or other action by shareholders, is required on a reconstruction or refinancing circular, this must currently contain all information necessary to allow shareholders to make a properly informed decision including, as set out in FCA guidance, disclosure of the impact on the company if the transaction does not go ahead.
The Review notes that this can require issuers to include disclosure on improbable and negative hypothetical outcomes which can create risks for the fundraising.
The Review therefore recommends that the approach to importance of vote language should be revised with a focus instead on the rationale for the quantum of fundraising and use of proceeds.
Make existing fundraising structures quicker and easier (implementation timetable: near/medium term)
The Review aims to identify areas in the current pre-emptive offer regime that can be streamlined and improved, noting that a reduction in the time and cost involved in rights issues and open offers may incentivise companies to raise funds by using a pre-emptive offer rather than a placing.
This section of the Review focuses on improvements to the post-launch timetable and makes the following recommendations:
- Reduce the minimum offer period: shortening the minimum offer period for rights issues and open offers to seven business days to reduce the delay in the issuer receiving the proceeds of the offer and to minimise concerns around market risk and price volatility in an extended offer period (and to limit the scope of any short-selling strategies). The Review supports keeping this minimum period under review as technological changes, market practice and developments in investor behaviour may allow for a further shortening of this period in the future.
- Change the scope of the two-third authority to allot: extending the flexibility to issue up to two-thirds of a company's existing share capital for any pre-emptive offer, including any form of rights issue or open offer, in order to reduce the requirement for a company to hold a general meeting for open offers.
- Provide flexibility to reduce the notice period for general meetings: the Review notes that an immediate change to the notice period could be challenging for investors that hold through an intermediated shareholding chain. The Review instead recommends amending the Companies Act 2006 to delegate authority to the Secretary of State to reduce the notice period for general meetings, other than annual general meetings, to seven clear days in the future once operational systems are in place.
- Update the pre-emption provisions in the Companies Act 2006: amending the pre-emption provisions in the Companies Act 2006 to align these provisions with the process that is followed when statutory pre-emption rights are modified. This will allow companies to exclude shareholders in certain overseas jurisdictions with onerous local offer requirements, allow for greater flexibility to deal with fractional entitlements and allow for the holders of other securities that have a contractual right to be included in the offer.
- Minimise the size of the rump of shares not taken up: allowing excess application mechanics to be attached to rights issues so shareholders can apply for additional shares before any rump placing to new investors.
As detailed earlier in this briefing note, the Review recommends that a prospectus should not be required for a secondary offer if the offer size is less than 75% of the issuer's existing share capital. Instead, the Review notes the following in relation to the alternative documentation that should replace a prospectus:
- Offer document: the Review considers that offer documents should have no specific content requirement nor be subject to regulatory review or approval. The content should instead be shaped by market practice. The Review anticipates that an offer document will typically include offer-specific information (for example, the reasons for the offer, anticipated use of proceeds and terms of participation), a cleansing statement, incorporation by reference of existing public disclosures and any additional disclosures required.
- Optional enhancements to continuous disclosures: issuers will be able to incorporate by reference existing public disclosures to assist with the preparation of an offer document. Where US or other international investors are anticipated to participate in the rump or any other secondary issue without a prospectus, companies can voluntarily opt-in to an enhanced continuous disclosure regime. The Review suggests that a potential route will be through enhanced annual report disclosures.
Increase the range of pre-emptive fundraising structures for companies (implementation timetable: near/medium term)
Placings are the most common structure used for secondary capital raises in the UK with the Review noting that rights issues and open offers are used as a 'last resort'.
The Review notes that UK issuers and investors would welcome a transaction option that combines the speed and flexibility of a placing whilst complying with the principle of pre-emption on a similar basis to the various accelerated rights issues available in Australia, which allow issuers to raise capital quickly whilst observing pre-emption rights.
Whilst fundamental differences between the UK and Australian regimes mean that accelerated rights issues could not be wholly adopted in the UK at the moment, the Review recommends that the principles of accelerated fundraising structures, including speed and observance of pre-emption rights, should be adapted for use in the UK market including:
- amending section 793 of the Companies Act 2006 (which allows issuers to request information from those holding an interest in shares) to require the disclosure of the identity of the ultimate investment decision maker or beneficial owner of shares so that investors can be contacted quickly using electronic means; and
- agreeing standard form terms and conditions with institutional investors which will be made publicly available for use on secondary fundraises, similar to the ECM terms used in Australia, to help to speed up the transaction process.
The Review also recommends that the concept of a 'cleansing notice' should be adopted in the UK where a secondary issue does not require a prospectus. The cleansing notice, issued at the time of a fundraising, will confirm that the company is in full compliance with its market disclosure obligations and that it is not delaying the disclosure of any inside information.
Start an ambitious 'drive to digitisation' (implementation timetable: near term)
The Review recommends that the UK should move to a system where all shareholders (including institutional and retail shareholders) will hold their shares in fully digitised form.
The Review notes that digitisation should mean more than simply the 'electrification' of paper certificates and should instead be an opportunity to make wholescale reforms and improvements to the entire intermediated shareholder framework, including ending paper-based processes in the securities settlement infrastructure for capital markets.
To oversee these reforms, the Review recommends that a Digitation Taskforce, supported by the UK Government, should be established. Since the Review was published, the UK Government has subsequently appointed Sir Douglas Flint as chair of the Digitation Taskforce which has published its Terms of Reference.
The recommendations contained in this Review will make meaningful reforms to the secondary capital fundraising market. The reforms are broad in scope and it is clear that the Review has taken the opportunity to make significant changes to the current regime.
For companies, the recommendations should significantly reduce the time, and costs, involved in fundraising. Certainly the reforms around the prospectus regime, coupled with HM Treasury's review, should materially shorten the pre-raise timetable.
The recommendations contained in the Review should also ensure that retail investors are more involved in capital raisings in the future – building on current progress in this area.
The reforms will take time to implement and, during this time, we will keep track of how issuers, and investors, react to these changes.